I remember returning to New Delhi after a semester at Yale University in Connecticut some years back and trying to move what I had in U.S. dollars to my bank account in India. The process of remitting these savings was so clunky – involving applications in banks in both countries — that I just used my U.S. debit card until the account ran dry. I’m sure I paid a bunch of fees and got short-changed on currency conversion costs, but I found it easier to spend this money rather than spending time trying to find a cheaper way.
Although the costs of remitting have fallen in recent years, they’re still above the United Nations’ Sustainable Development Goal of 3% per transaction by 2030. A world bank study shows that the overall average costs of transmission were 6.5% in 2020, with sending money digitally costing slightly less and sending via bank transfer slightly more.
That means for every $100 you want to remit abroad, you really only send around $93 on average. This varies depending on how you move your money and by where you’re sending money to and from. For example, remitting from a Group of Twenty (G20) country will on average cost just more than 3% if it’s going to India, but more than 6% if it’s going to South Africa. When money is sent within Sub-Saharan Africa, fees can into as much as 20% of the amount.
That’s a heavy cost for what should be a simple transaction. According to the World Bank, global citizens sent and received more than $650 billion in personal remittances in 2019. That means we lost around $45 billion to costs alone.
Fortunately, there are a few things you can do to lower your own costs when trundling money around the world. But keep in mind that exact costs will depend on where you are and where you’re remitting to.
First, it helps to know that there are two main components of the cost in sending money abroad: the fees of the bank or transmitting entity you use, and the foreign exchange margin they make when they buy at the lower end of the currency exchange rate and sell at the higher end. You should check both before you move any money. You’re getting a good deal if your total cost — fees plus the currency exchange margin — is lower than 5% of the transaction amount. If you’re being offered 8% of the amount, that’s generally too much.
You should also consider where you go. There are four entities that will do the job: banks, credit and debit cards, traditional money transfer firms and fintechs. No surprises here that the banks and cash transfers cost the most and fintech firms the least.
If the country you’re remitting to allows for exchanging mobile money through e-wallets, then that’s likely to be the cheapest way to send and receive money. Find a licensed, regulated entity that works between the geographies you want to move money between, and check if the total cost is less than 5%. But keep in mind that certain places don’t have wallets that work with each other, and that there may be country specific rules around the movement of money.
Cost isn’t the only consideration either. Perhaps it’s worth paying the higher bank transfer fees because you get the greatest sense of security from going through that institution. It usually helps to find others you who have made similar payments and see what worked best for them.
Of course, what you decide to use will ultimately depend on your goals. Are you trying to set up a child who’s just moved abroad? If so, going through a bank is still your best bet. And you’ll want to make sure they have at least two months of rent, food and other expenses in cash since setting up cross-border bank accounts takes time.
Are you sending money back to your family on a regular basis? Then you’ll want a cheaper fintech solution if possible, otherwise a bank will remain your friend. If you’re just traveling for a short period (once we’re traveling again), you can simply use your debit or credit cards to get access to your own money — check with your card company, though, about any foreign transaction fees — or you can use mobile money in the form of e-wallets.
No, these solutions aren’t perfect, and yes, the remittance system remains a headache. We can only hope that as crypto currencies gain acceptance, moving money across countries will become as fast, easy and cheap as moving money within them.
